After the last week's drop stocks rebounded

Market analysis - 10/11/2019

Equity markets rebounded this week while bonds experienced a correction.

Investors continue to attempt to gauge the reality of the deterioration in global manufacturing activity and the impact of the countermeasures in the form of monetary and fiscal support.

Short-term market movements continue to depend on a tweet or data that are generally contradicted the next day.

Nevertheless, this affects the overall trend by weighing on investor confidence and market participants and explains our cautiousness in terms with regard to our portfolio allocation. 

  European equities

After losing -3% in the first week of October, this week European equities gained back some ground, against the backdrop of the first Q3 results publications. In terms of good news, LVMH surprised with the resilience of its sales, which rose 17% over the quarter (and 11% organically) despite the slowdown of the Chinese economy and the troubles in Hong Kong. SAP announced both the departure of its CEO Bill McDermott and good Q3 results (both in terms of margins and growth). Lastly, at its investor day, Wirecard raised its medium-term (2025) turnover and EBITDA targets.

These good publications were unable to draw attention away from a series of profit warnings: Plastic Omnium on its operating margin, Qiagen that disappointed on Q3 growth, which triggered the departure of its CEO, recruitment specialist Pagegroup, which noted a slowdown in France and the UK, Chr Hansen and Novozymes in enzymes, Philips that disappointed on its sales and EBITDA, Hugo Boss that issued a warning on its expected turnover and EBIT, and Publicis, which revised down its 2019 growth target.

During the week, Cellnex announced a capital increase to finance the acquisition of the telecoms unit of UK company Arqiva for £2bn. The Hong Kong Stock Exchange withdrew its bid for the London Stock Exchange, and Fortum announced the acquisition (subject to the approval of the authorities) of the stake in the German group Uniper (of which it already owns 50%) held by the funds Knight Vinke and Elliot (for 20.5%, i.e. €2.3bn).

Lastly, at its investor day, Euronext set its 3-Y growth targets, and stated its intention to grow externally, even if this requires carrying out a capital increase. 

  US equities

The S&P 500 and Nasdaq gained 1% and 1.3%, respectively, over the week following renewed optimism kindled by hopes of an agreement between China and the US on the trade war, with the new trade tariff hikes scheduled to come into effect on 15 October. High-level trade negotiations restarted in Washington on 10 October, and the session was marked by a tweet by Donald Trump announcing his intention to meet with the Chinese Prime Minister today (11 October). Donald Trump also announced the lifting of some of the sanctions on Huawei, authorising certain US firms to deal with the Chinese tech company again.

On the macroeconomic front, with 136,000 new (non-farm) positions created in September, net new jobs were a bit weaker than the 145,000 economists were expecting. According to the Bureau of Labor Statistics, the unemployment rate dropped by a further -20bp in September, to reach a half-century low of 3.5%. The probability of a contraction of the US economy is at its lowest level since April, which appears to confirm the cautious optimism of the Fed members. The US 10-year government bond increased by 12bp over the week, and the Brent price rose 3% to $60.

At the sector level, financials clearly benefited from the rebound of interest rates and recorded one of the best sector performances of the week at +1.30%, just behind technology at +1.5%. The losses came from the energy (+0.2%) and utilities (+0.4%) sectors. It was a calm week with regard to corporate news, with the Q3 reporting season not starting until next week. 

  Japanese equities

While the Japan economic composite index (CI) for August released on 07 October was down 0.4 from the level of the previous month, its impact on the Japanese stock market was limited. The TOPIX posted a marginal gain of +0.54% this week.

The Chemical sector was the top performer and retail trade was firm. A comprehensive chemical manufactures Asahi Kasei was cheered by the news that Akira Yoshino, honorary fellow at the company, won the Nobel Prize for developing the basic technology of lithium–ion battery. The company has an important market share for the LiB separators of the battery now widely used for many smartphones and electronic vehicles. Other battery-associated names having strength in producing key components of the battery such as cathode material were also boosted.

Fast Retailing attracted investors’ attention as the UNIQLO operator expanded their overseas income rapidly to exceed their domestic income. Overseas sales ratio of Japanese domestic demand oriented sectors are even increasing to 10% to benefit from “global domestic demand’ growth as shown in the retail trade and services sectors.    

On the other hand, the insurance sector (-2.72%) dropped on a concern about another extremely strong typhoon Hagibis approaching Japan. Major non-file insurers, Sompo Holdings and Tokio Marine Holdings sank on worries over expected increase in losses from the extraordinary climate. 

  Emerging markets

The MSCI Emerging Markets index ended the week in negative territory with volatility and uncertainty taking a toll on markets. Market attention continues to be focused on the upcoming US-China roundtable in Washington started on the 10 October and on the confirmation of delay in the implementation of the tariffs on the 15 October. China is said to narrow the scope of talks, market participants are now pricing 50/50 chance of a 15 October’s tariff delay. Eight Chinese companies were added on Monday to the US entity list : Hikvision, Dahua, Sensetime, Megvii, iFlytek, Meiya Pico, Yixin and Yitu. Most of them are surveillance and AI leaders in facial recognition. Golden Week tourism numbers in China showed a deceleration from previous years, with domestic volume increase of 7.8% (vs 9.4% in 2018, 11.9% in 2017).

In Taiwan TSMC posted strong Q3 revenues, +22% QoQ, +13% YoY, beating market estimates and its own guidance thanks to better-than-expected demand from iPhone, 5G smartphone and HPCs. In South Korea, Samsung Electronics (SEC) beat the market's rising expectation with preliminary operational figures, driven by higher than expected DRAM shipment, which more than offset the average selling prices decline.

In India, the proposed merger between Indiabulls Housing Financial and Lakshmi Vilas Bank was rejected by the RBI, prompting concern about Indiabulls’ future. The consequence was a drop in its share price, which was down 18.5% on the news. TCS reported numbers below expectations on both revenue growth and margins for 2QFY20.

In Brazil, the second round of the Pension reform was postponed due to the discussions of the transfer of rights proceeds sharing. As we move into the year end, the main focus will be the transfer of rights expected to happen this week and on the 06 November. The ANP (National Energy Agency) kicks off the oil field auctions with 17 oil companies bidding for 36 blocks. In total, the government is expected to raise BRL 106.5bn (with BRL 33bn going to Petrobras). On the company front, Bradesco proposed an extraordinary dividend of BRL 8 billion (3.2% yield) to be paid on 23 October. The goal of the new dividend policy is to achieve an optimal capital structure and return excess capital to shareholders, a positive announcement as it increases visibility on the dividend policy, boosts ROE (given that Bradesco will have a lower capital base), and reduces M&A risk. Santander Brasil announced its first guidance for 2022 with a 21% ROE, which came better than expected. 

  Corporate debt



After a lackluster start of the week, the market rebounded, driven by a potential partial agreement between China and the US and new hopes of a Brexit agreement. Boris Johnson and the Irish Prime Minister Leo Varadkar announced that they see “a pathway” to a compromise over the key issue of the Irish border. In this context, the Xover and Main indices recorded a widening of 10bp and 2bp, respectively, at the start of the week before seeing it erased as from 09 October.

The issuer Nordex outperformed following its €100m capital increase carried out via private placement by its shareholder Acciona. The Codere bonds suffered this week. The group said it has discovered accounting discrepancies at some of its Latin American subsidiaries in 2019. EBITDA forecasts were thus revised down by around €20m for the year. We note a flow of buyers to Kedrion; the group's two shareholders, the Marcucci family and the FSI, have agreed on a capital increase of around €50m that should lower its leverage.

Levi Strauss & Co published results in line with expectations, with sales up 4% buoyed by the good performance of the International segment. Plastic Omnium issued a profit warning on its 2019 results due to greater operating difficulties than expected in its new factory in Greer in the US. Kraton also revised down its EBITDA forecasts, and the bonds subsequently lost 4 points.

Cellnex will acquire Arqiva’s telecoms unit, including mobile masts, for £2bn. Following this transaction, which should be finalised in H2, Cellnex will become the main independent mobile infrastructure operator in the UK. Furthermore, according to the press, HSBC is about to announce up to 10,000 new job cuts in Europe, in addition to the 4,700 jobs already affected by the cost-cutting plan. The announcement could be made during the presentation of Q3 2019 results. 

The primary market was not very active. We note the issue of a Tier 2 bond by the Bank of Ireland for €300m with a coupon of 2.375%. 


Again a quiet week for convertible bonds markets. A blackout period seems to have switched « on » on this bond segment with thin volumes and no primary issuance.

In the rest of the news, LVMH has reported its Q3 2019 with revenue standing at €13.3 billion a +11% organic growth amid remarkable Fashion & Leather goods division numbers (+19% growth). The Swiss semiconductor company AMS announced that it has been unsuccessful in its takeover offer for OSRAM (yet indicated it intends to pursue with the full acquisition).

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